Working Paper Revision

Firm Dynamics and SOE Transformation During China’s Economic Reform

Abstract: We study the reform of China’s state-owned enterprises (SOE) with a focus on the corporatization of SOEs. We first document the empirical patterns of the "grasp the large and let go of the small" policy. To quantify the implications of the reform for aggregate output and TFP, we build a three-sector firm dynamics model featuring financial frictions and endogenous firm-type choices. Our calibrated model shows that the SOE reform can increase long-run TFP by encouraging the exit of the least efficient firms in the state sector, but the magnitude of TFP growth also depends on the efficiency in capital reallocation. In the short run, corporatization increases aggregate output and TFP because it allows the most productive SOEs to have a higher borrowing capacity than they would under privatization.

Keywords: firm dynamics; economic reform; Chinese economy;

JEL Classification: E23; E44; O16; O41; O43; O53;

https://doi.org/10.26509/frbc-wp-202124r

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2022-04-18

Number: 21-24R

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• Working Paper Revision: Firm Dynamics and SOE Transformation During China’s Economic Reform